CONDUCT OF MONETARY POLICY

WEDNESDAY, FEBRUARY 2, 1977

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,

Washington, D.C.

The committee met at 2 p.m. in room 2128 of the Rayburn House Office Building; Hon. Henry S. Reuss (chairman of the committee) presiding.

Present: Representatives Reuss, Moorhead, St Germain, Gonzalez, Minish, Annunzio, Hanley, Mitchell, Neal, Patterson, Blanchard, Hubbard, LaFalce, Spellman, AuCoin, Tsongas, Derrick, Hannaford, David Evans, Allen, D'Amours, Lundine, Badillo, Pattison, Cavanaugh, Oakar, Mattox, Vento, Barnard, Watkins, Stanton, Brown, Wylie, Rousselot, McKinney, Hansen, Hyde, Kelly, Grassley, Fenwick, Leach, Steers, Thomas Evans and Caputo.

The CHAIRMAN. Good afternoon. The House Committee on Banking, Finance and Urban Affairs will be in session for the start of the current hearings on monetary policy.

We are faced with continued economic stagnation. The Nation is watching the Congress and the new administration closely to see if a workable formula can be devised so that we move to a full-employment economy.

Any formula designed to put people back to work and to restore economic growth must include a sound monetary policy. We cannot afford anything less. The stakes are too high, particularly for the nearly 8 million in the unemployment lines.

This committee, with its oversight powers and the added responsibilities of House Concurrent Resolution 133, has a heavy obligation to assure this coordination and shape monetary policy consistent with sound economic growth. Even with the best monetary and fiscal policy we face an uphill battle to restore economic health. The economic pause that began last spring is still with us. Despite some encouraging statistics and rising optimism in December, the consensus forecast of late January is again not very encouraging. Unemployment of 7.9 percent is unacceptable. Minority unemployment, which may approach 50 percent in some of our central cities, is scandalous. Some cite bad weather, bad luck, and OPEC as excuses for our current economic problems, but these events cannot justify long-term economic stagnation.

The Nation is looking for action. President Carter fully recognizes this. He has helped to restore national confidence by moving quickly to send Congress an economic stimulus package. Certainly, the package contains nothing which should alarm cautious monetary managers. If the administration's calculations are correct, we will have

(1)

a 6 percent growth in GNP and a reduction of unemployment to the 6.7 to 6.9 range by the end of 1977, and to 6 percent by the end of 1978.

Our witnesses this afternoon are the architects of the economic recovery package. I know this is a busy and difficult period for the new administration, and I'm honored and delighted that two very strong members of the team, Secretary Blumenthal and Director Lance, were willing to take time to consult with this committee. In devising the package, I'm sure that the Secretary and the OMB Director and other Presidential advisors spent many long hours wrestling with the questions concerning the impact of monetary policy and the coordination of monetary policy with fiscal. It is important. that this committee know what kind of monetary thinking and coordination went into the package so that we may assist in avoiding miscalculations by our monetary managers.

Gentlemen, we appreciate your willingness to discuss the administration's economic plans with us and to share in our deliberations over monetary policy.

You both have, consistent with our rule, presented to us comprehensive statements which we have had an opportunity to read and for which we are grateful. They will, under the rule and without objection, be received in full into the record.

It may be that either or both of you would wish, in your oral presentation, to hit the high spots and summarize, but that is entirely up to you. We know of the demands on your time. We hope to complete our questioning under the 5-minute rule and to let you go as soon as possible this afternoon.

Secretary Blumenthal, would you be kind enough to start out. STATEMENT OF HON. W. MICHAEL BLUMENTHAL, SECRETARY OF THE TREASURY

Secretary BLUMENTHAL. Mr. Chairman, members of the committee, I do want to express my pleasure and appreciation for this opportunity to make my first appearance before your committee in connection with the economic stimulus package and with the particular concerns of your committee relating thereto.

Mr. Lance and I have previously testified with regard to this package of proposals before a number of committees, and you are, I'm sure, generally familiar

The CHAIRMAN. Can we turn that up a little bit?

Secretary BLUMENTHAL. I'm told I'm not live, Mr. Chairman.

The CHAIRMAN. I think we heard you before. so just keep on where you were.

Secretary BLUMENTHAL. I will just-rather than reading the full testimony, Mr. Chairman-hit some of the high spots and dwell, perhaps, in a little more detail on the last elements of it, which relate in particular to the budget and the credit markets. And Mr. Lance will address himself to the general Federal budgetary elements included in these proposals.

I think it is perhaps important to stress at the outset, Mr. Chairman, that in devising an economic stimulus package, the administration was guided by an attempt to develop a set of proposals that were

balanced, that would meet the needs of the economy, as we saw them, but would not be excessive so as to raise the risk of rekindling inflation and allow us to continue to work to get inflation down; responsible in the sense that we did not wish to make proposals even though they might seem and sound attractive at the moment but which would not really have a very good chance of being implemented and administered efficiently within the timespan that we were considering; and that addressed themselves as much as possible to a variety of simultaneous goals that we felt we saw before us.

One of the goals was to put more purchasing power into the economy in order to bring us to a higher level of economic activity and thereby to stimulate greater investment activity.

Another goal was to address ourselves to the structural unemployment problems as they exist in some of the areas of our country; in other words, to try to begin to help to the maximum extent possible those people who, even at a high level of economic activity, are unable to find work because of lack of skills or for a variety of other reasons. We also had very much in mind, Mr. Chairman, the fact that we did not wish to relinquish at this early stage, to give up at this early stage, a substantial amount of permanent revenue, bearing in mind that the sum total of the Carter administration proposals-and programs clearly have not been elaborated.

We require some work on this, and therefore, we sought to combine measures that involved some temporary loss of revenue and thereby an increase in the deficit with a series of measures which do have a permanent revenue impact but which begin to address themselves to the question of fundamental tax reform, tax simplification, stimulation of business for a greater investment, the sorts of things we want to do in the long run, anyway.

Furthermore, Mr. Chairman, I think it's important to recognize that we admitted at the outset that we have not tried to do all of the things that need fixing. My colleague here has become famous in Washington for the expression, "If it ain't broke, don't fix it." I think that's a good, sound principle. But there are some things that do need fixing that we all agree on in the economic area. But it is clear that in this kind of program, which had to be developed quickly and which, if it is to work, has to be implemented quickly, we simply cannot address ourselves to all of the many sound ideas that we really ought to be concentrating on over the somewhat longer run. So we would have to plead guilty at the outset in not being totally comprehensive in the various things we seek to do.

Speed is clearly of the essence. Balance is of the essence. The program, as we are presenting it, involves an additional budgetary cost of roughly $15 billion in fiscal 1977. There is a real problem here as to how to start it up and what kinds of programs really will get into the spending stream quickly, still in this fiscal year.

It is for this reason that the tax rebate is an important element of that first phase of the program.

In fiscal 1978 with the rebate dropping out, the second part of the program, another $15 billion, addresses itself much more to some of the spending programs, job-creating programs, as well as the permanent. tax programs which will begin to have an impact more in the next fiscal year.

Between the 2 years, the remainder of 1977 and 1978, there is a total budget cost of $30 billion.

Just let me just briefly hit the main highlights of the tax program. I will not go into the same detail here as is contained in my written presentation. The rebate, involving an expenditure of $11.4 billion, would involve $50 per person. We tried to cover as many people as possible and think we will have covered 96 percent of all persons under this particular proposal. If approved by the Congress, we would expect to mail these checks in April, May and June. And we would expect that this amount of additional purchasing power would have an important positive influence on accelerating the growth trend of the economy, the basic thing being that that growth trend has been too slow to eat into the substantial unemployment figures.

We still have an industrial capacity being utilized at only about 80 percent, and that, together with the almost 8-percent unemployed, leads us to conclude that this additional purchasing power can make an inroad into that and do so without any fear of rekindling the inflationary flame.

The second element of the tax package is an effort to begin the task of simplifying our tax system. It is addressed essentially to the lowest income taxpayers by substituting a simple method of just looking up your tax in the tax tables instead of a complicated calculation. This will be accomplished by means of a flat standard deduction that will apply to all of those who take the standard deduction, which we estimate will be about 74 percent of all taxpayers, if this proposal is enacted.

The third element is business tax relief, which will last longer than one or two years and which will involve on an annualized basis an expenditure of $2.6 or $2.7 billion, with a choice being given between those who wish an increase in the investment tax credit from 10 to 12 percent-in other words, an additional 2 percentage points-and those who wish to select instead a 4-percent credit on payroll taxes against their income taxes. This will provide an opportunity for those employers who are in businesses that are capital intensive to choose the device that is of most benefit to them and others who would tend to be in industries that are more labor intensive, service industries, or who are not investing, to get this benefit in a different form.

This kind of modest relief to business in the form of some reduction in taxes, we think, together with all of the other elements in our overall program, would also have a positive impact. It's clear that, by itself, it is rather modest. It should be construed as being but a first step in the total review of the tax structure that I hope we will be able to do later on. In the course of this year we will come back to the Congress when we conclude our studies.

The total impact of these tax proposals involves an expenditure of $13.8 billion in 1977 and roughly $8 billion in 1978, the shift being the disappearance of the impact of the rebate after 1977 and the greater impact of some of the other tax programs to which I have referred.

The second part of our package involves some greater expenditures in public works, essentially a request for authorization of an additional $4 billion in public works, $2 billion for 1977, $2 billion for 1978. The spending impact of those stepped-up public works programs—which,